A government might want to reduce aggregate demand if it believes that the economy is expanding beyond its long-run capabilities.
Contractionary fiscal policy does the opposite. Lower the level of aggregate demand by reducing consumption, reducing investment, and reducing government spending, either through government spending cuts or tax increases. Aggregate demand refers to goods in demand rather than all goods available, and demand seems to correspond more to purchases than available.
Tax policy affects aggregate demand through changes in government spending and taxation. These factors affect employment and household income, which in turn affect private consumption and investment. Monetary policy affects the amount of money in the economy which affects interest rates and inflation.
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